New Keynesian Models: Not Yet Useful for Policy Analysis

Abstract

Macroeconomists have largely converged on method, model design,
reduced-form shocks, and principles of policy advice. Our main disagreements
today are about implementing the methodology. Some
think New Keynesian models are ready to be used for quarter-to-quarter
quantitative policy advice. We do not. Focusing on the state-of-
the-art version of these models, we argue that some of its shocks
and other features are not structural or consistent with microeconomic
evidence. Since an accurate structural model is essential
to reliably evaluate the effects of policies, we conclude that New
Keynesian models are not yet useful for policy analysis. (JEL E12,
E60)